No More Learning

Although the privatization and pension reform record has been mixed under the Fund program, ratings agencies have praised fiscal consolidation in awarding recent sovereign upgrades. As a tiny EMBI slice foreign investors have taken positions in external bonds and also moved into local T-bills. The exchange along with other ex-Yugoslav ones shares data with the Vienna bourse under an information and commercial partnership, and Austrian units control 40 percent of Serbia’s financial services. As it bids for official EU candidate status WTO negotiations are also proceeding with a target entry date of early next year.

Croatian shares in comparison are ahead modestly as under its own economic recovery plan the government seeks to escape recession and pare the 5 percent of GDP budget gap. The coalition remains weak with end-year elections in sight, and ship-building in particular has slumped. Slovenia ended its hold on the country’s EU submission, but popular support for inclusion sank according to opinion polls after wartime generals were sentenced by the Hague’s International Criminal Tribunal. 30 of 35 chapters have been closed but formal admission has likely been postponed past mid-decade. Competition policy is a key sticking point with many state firms still receiving preferences and subsidies and anti-monopoly laws lacking as the Balkans’ heavy history relinquishes longstanding protections.

Kazakhstan’s Acclaimed Candidate Cant
2011 May 26 by admin

Posted in: Asia
Kazakhstan’s veteran central bank head Marchenko was proposed by the prime minister as an IMF managing director nominee with Russia’s endorsement against emerging market candidates from other regions, as President Nazarbaev, after winning re-election with a 95 percent margin, hosted the annual EBRD conference in Astana. Marchenko’s chances were immediately dismissed by global succession-race watchers, and he admitted scant enthusiasm for returning to Washington after a brief study spell in the 1990s. The President’s victory on reported 90 percent turnout was tainted by “serious irregularities,” according to an international observer mission from the Organization for Security and Cooperation in Europe which he chaired under a regular rotation. Originally the exercise was a referendum on indefinite term extension, but a last-minute runoff was called giving the limited legal opposition little scope to compete. Parliamentary polls are due by next year which will give challengers another chance, regime supporters pointed out during the EBRD’s session, which focused on potential loan and technical assistance expansion to the “democratizing” MENA area. Kazakh authorities have already backed new client activity in nearby Mongolia in cooperation with China, which has large mining investments and a yuan trade settlement facility there in a similar relationship. National oil production is 1. 5 million barrels/day although the Kashagan field project remains stuck in environmental and royalty clashes with foreign partners. Kazmunaigas has doubled its stake in the consortium after previous disputes, and a partial sale is possible under upcoming “people’s IPO” which have buoyed the stock exchange and will be dual-listed in London under preliminary privatization plans.

The sovereign wealth fund S-K is trying to unload holdings after injecting $6 billion in BTA and Alliance Banks during the crisis, as the sector still struggles with a 30 percent bad loan portion concentrated in real estate and consumer lines. Even with another year of commodity driven 7 percent level GDP growth, credit provision is flat. Tax law changes may facilitate write-offs, and the central bank may establish a separate distressed asset vehicle to aid workouts. Post-2008 deleveraging has halved the loan-deposit ratio to below one, and despite regular intervention to brake appreciation the currency is heading toward 140 to the dollar. Foreign exchange reserves have been rebuilt to near $40 billion on a 4 percent of GDP current account surplus, although inflation is again veering toward double-digits on higher food prices. Neighboring Russia is also battling that scourge as it enters its own presidential election season, with the candidate crop still on the vine as earlier equity gains wither.

The World Bank’s Multi-Polar Disorder Prescription
2011 May 25 by admin

Posted in: IFIs
The World Bank, under the auspices of its chief economist well-known in Chinese policymaking circles, published the first in a coming series of long-range Development Horizons studies predicting multi-currency use in 2025 based on emerging market-led commercial and financial “poles” guided by the BRICs. Developing countries now account for half of international trade and one-third of their FDI is “South-South. ” Two-thirds of official foreign exchange reserves are outside the industrial world, and related sovereign wealth funds are among the largest institutional investor sources. Borrowers such as Chile, Turkey, and Brazil command lower spreads than European counterparts, yet since the collapse of the Bretton Woods system 40 years ago no reserve currency from these jurisdictions has entered the mix with the dollar, euro, yen, and pound, and the IMF-created SDR likewise lacks such a component. Over the next decade and a half emerging economies’ GDP growth over an average 4. 5 percent will be double the advanced country norm, and the half dozen biggest ones will power the majority of global output. They have moved to the faster trajectory initially through total factor productivity — in land, labor and capital — gains that may soon join with innovation strides, as “rebalancing” occurs through switches from external to domestic demand. In China consumption will rise to over 50 percent of GDP during the period, with Latin America’s share already at 65 percent. Cross-border M&A from emerging market firms was one-third the world figure in 2010, and many active acquirers are able to tap billions of dollars through international bank loans and debt and equity financing, as well as access comparable sums in local capital markets. The net creditor position of major EMs will exceed $15 trillion under the study’s baseline scenario, setting the stage for a multi-polar monetary system to accompany trade and investment flows.

The renimbi will likely feature at the forefront of new entrants, according to the authors, as convertibility restrictions are progressively removed. Commercial trade settlement and bilateral and multilateral central bank arrangements have proliferated under incremental liberalization, and the currency could first be adopted as an Asian standard before receiving more widespread acceptance. The yuan could join with other emerging market units in a redefined SDR with the endorsement of G-20 Fund shareholders, who could also encourage private circulation of the synthetic denomination as an alternative to national and regional offerings. In this more diverse future, however, the preponderance of developing countries with their small heft will remain at risk of foreign currency mismatches and vulnerabilities even as the “fortress dollar” cedes impregnability.

Vietnam’s Wavering Resolution
2011 May 25 by admin

Posted in: Asia
Vietnamese stocks deepened their loss string despite Hanoi’s hosting of the annual Asian Development Bank gathering as inflation burst past 20 percent to challenge the recent “resolution 11” fiscal and monetary tightening package. The measures originally triggered brief equity and bond rallies as the benchmark interest rate was taken to almost 15 percent and officials vowed otherwise to throttle runaway credit at 120 percent of GDP. At the same time to revive currency confidence, they suspended further devaluation while cracking down on informal dollar and gold trading. However ADB participants were told that economic growth would likely slow to 5 percent as the trade deficit continued to widen to 15 percent of output, with international reserves not reported but estimated at around $12 billion. To cut the budget deficit, fuel and electricity prices were lifted, and food also jumped on anxiety ahead of the spring harvest season. Ratings agencies, after pausing from last year’s downgrades, reinforced jitters with calculations that sovereign contingent liabilities could hit 60 percent of GDP under the weight of state bank recapitalization and bad loan coverage. NPLs using local standards are under 5 percent, and after repeated criticism of data and transparency the central bank has agreed to a formal IMF-World Bank comprehensive financial sector assessment to identify prevailing conditions. The default by shipbuilder Vinashin has not been addressed despite a stream of creditor requests for meetings and negotiations. Companies have been unable to tap the external debt market despite the success of neighboring high-yield borrowers such as Chinese property developers. Regional and US-European individuals and institutions have heavily subscribed these double-digit return issues which increasingly feature “perpetual” structures. In a much-noticed example, unrated Sino-Ocean Land completed a $400 million 10 percent deal in the wake of fraud found at other lesser-known mainland placements like China Forestry, which had partnered with the Washington, DC-based Carlyle buyout firm. Asia dollar-denominated activity was at $35 billion in May, with medium-term projections by underwriters for $100 billion annually.

The Philippines exchange has also been floundering after the central bank raised rates on consecutive occasions to keep inflation below 5 percent, despite fiscal improvement which may limit the deficit to 2 percent of GDP should current patterns hold, even with a new public transport cash transfer program for operators and riders. Remittances which undergird the balance of payments have dropped on troubles in Japan and the Middle East, and should they spread to core Gulf locations Manila may have to form its own resolution stance.

South Africa’s Stalwart Alliance
2011 May 20 by admin

Posted in: Africa
South African shares slid clearly into the negative column after the opposition Democratic Alliance held the ruling ANC to a 60 percent popular vote in local elections and diversified its support base beyond better-off white citizens. National opinion surveys revealed routine dissatisfaction with public service delivery which DA control in Cape Town had worked to rectify, and poor marks assigned to President Zuma’s anti-poverty and unemployment record since taking office. The ANC’s Youth League has mounted its own attack on the government for shrinking from stronger state economic intervention including nationalization and capital controls, while the labor union federation has assailed its “corruption and greed” as it presses for wage rises above current 4 percent inflation. Planning Minister Manuel has openly warned of reverse racism affecting business policy, with black majority interest groups accusing successful Indians of “colonial” behavior. Despite the commodity boom in gold, platinum and other minerals, GDP growth at 4 percent lags Sub-Saharan neighbors as household debt and lackluster private investment weigh on prospects. The PMI hovers at 55 with ample slack in manufacturing capacity, although auto activity has recently picked up in contrast with the moribund clothing sector. The rand remains a favorite carry currency with benchmark bond yields at 8 percent, but has tumbled to 7 against the dollar as the current account deficit is set to widen to 3. 5 percent of GDP. Inflation, pushed by oil import costs, is due to touch the upper 5-6 percent target range, but the central bank has paused in its hiking cycle. Europe’s and Japan’s difficulties are choking exports, as trade and financial ties with fellow Brics deepen following the country’s debut at an April summit in China. Local fund managers have already redirected debt and equity allocation to these outside big emerging market destinations following capital account liberalization in the last budget.

Firms have also signed up for a major foreign investment conference in Zimbabwe as octogenarian President Mugabe calls for fresh elections to end the teetering coalition and immediate implementation of the indigenization law mandating 51 percent ownership of multinational operations. Discussions with Western official lenders on clearing $7 billion in accumulated debt are at a standstill, as domestic banks also grapple with non-performing portfolios at one-third the total. The central bank itself had to be recapitalized and no longer manages exchange rate policy with the multiple circulation of the dollar, euro and rand. Despite the political push by ZANU-PF loyalists, economic officials have questioned whether the $500 million estimated expense of new polls is affordable as democracy and free-market campaigners are crushed by mounting bills.

The Pacific Alliance’s Bellicose Bluster
2011 May 18 by admin

Posted in: Latin America/Caribbean
Stocks were unmoved from slides to date as Chile, Colombia, Mexico and Peru formally joined in a “Pacific Alliance” representing one-third of Latin American output and half of exports. The three outside Mexico had previously linked up through the MILA joint exchange which will be second in size to Brazil’s at $700 billion. The broader initiative will extend free trade and labor movement multilaterally to complement bilateral pacts. Lima’s index has been down over 20 percent with the even match between leftist Humala and conservative Fujimori for the presidency after the business community’s favorite candidates faded. GDP growth could fall by one quarter to 6. 5 percent this year on softer construction and manufacturing despite 20 percent annual credit expansion, according to officials. Inflation is over 3 percent, and the central bank has continued 25 basis point interest rate rises as rater Moody’s recently warned of overheating. Humala’s original campaign platform vowed renegotiation of mining agreements and higher corporate taxes to fight poverty, while Fujimori’s stressed her father’s law and order legacy and open market-privatization push which risks alienating powerful labor groups. In Chile, worker wage demands have sent inflation to the same level, with the monetary authority lifting the benchmark to 5 percent from the previous near-zero rate under quantitative easing. Domestic demand is up 15 percent from the year-ago quake period, while copper-related inflows have resulted in record peso strength despite $4 billion already used for intervention. As an oil importer, fuel subsidies have caused a 1 percent of GDP fiscal deficit which may worsen with reconstruction spending.

Colombia’s sovereign investment grade return has brought decent cross-border bond and equity allocation according to fund monitors, as private foreign debt has almost doubled to $28 billion the past year. The Santos Administration predicts 5 percent GDP growth aided by likely imminent passage of a US free trade deal, as $20 million daily entry under an inherited smoothing program has not broken the peso’s rise. Flooding has lifted food prices, as the central bank’s progressive “normalization” leaves the policy rate at 4 percent. Mexico’s bourse has seen $400 million in outflows, although long-term Treasury bond commitments remain solid at $1 billion. The currency has soared past the 12 to the dollar barrier on historic international reserves of $125 billion supplemented by a 2-year $70 billion IMF flexible credit line. The government rejects resort to capital controls, and has imposed anti-monopoly penalties on phone magnate Slim. However auto production slipped in April on Japan’s supply disappearance and oil capacity is also dwindling as the next presidential election cycle approaches, with fiscal reform on hold as a bitter aftertaste to the current sweet spot.

Haiti’s Musical Chair Chafing
2011 May 16 by admin

Posted in: Latin America/Caribbean
Haitian musician Martelly was inaugurated as President after an outsize election victory despite slim turnout and declared the island “open for business” in his accompanying address as an historic first peaceful party transfer took place. However, as he names his government and attempts to introduce new laws and policies to reinvigorate immediate rebuilding and long-term anti-poverty efforts, his grouping is a minority in parliament and more forceful judicial review could also act as a check. As he entered office the IMF, which extended a $40 million adjustment loan as part of donors’ 2-year $5. 5 billion package, completed an initial assessment of program implementation which cited delays despite overall solid commitment and performance. Outside debt relief, less than one-third of the aid has been disbursed awaiting the poll results, and dedicated reconstruction has been “slow,” according to the document. GDP decline in fiscal year 2010 was 5 percent compared with the original 8. 5 percent estimate as agriculture stabilized, while inflation is over 7 percent on higher food and fuel costs which spurred riots under the Preval administration. The budget deficit excluding grants was 5 percent on better tax collection, and the current account gap also improved to 2. 5 percent of GDP as international reserves topped $1 billion. Since last September the currency has appreciated 5 percent, and private sector credit has increased by the same figure on good bank liquidity and profitability indicators. Retail petroleum costs were hiked 30 percent in March to reflect global trends without social unrest, although inflationary pressure and exchange rate softening could follow. Next year’s public investment spending for post-earthquake related and humanitarian purposes will be financed in part from the Petrocaribe loan arrangement with Venezuela, with $200 million still in the account after Caracas cancelled twice that amount in outstanding obligations.

The central bank will be repaid through special bond issuance for old finance ministry borrowing as Treasury bill and broader government securities markets take shape with outside technical assistance. Foreign exchange trading will also be modernized, and a law on monetary authority independence will be introduced by year-end. A medium-term debt strategy should be devised as non-concessional access evolves, and officials have already committed to overhauling the state electricity network to stem losses and prepare for a new Northern industrial park which has emerged as the main showpiece post-disaster venture. Land title and business registration reform are likewise on the priority list to move up in World Bank rankings as President Martelly presses to realize a campaign promise of moving voters into durable housing and jobs.

The EU’s Naked Derivatives Ambitions
2011 May 15 by admin

Posted in: Europe
French and German officials lauded the near-completion of rules limiting “naked” CDS positions, where the buyer does not own the underlying bond, which were originally blamed for magnifying Greece’s sovereign distress last year to compel unprecedented outside bilateral and multilateral credit lines. Subsequent investigations absolved the shorting technique as the main cause of double-digit Greek yields and long-term market access loss which have persisted amid continued private restructuring and official program expansion talk. The tools, which had been subject to temporary national bans, did not feature as prominently in the ensuing Irish and Portugal debt sagas, and US counterparts have argued that restrictions would undermine liquidity and standard business hedging. The European approach tends to presume a speculative bias and also affords less flexibility in moving permitted derivatives activity generally to mandatory clearinghouses. For foreign exchange trading in contrast Washington regulators have agreed to broad exemptions, while newer EU members in the East trying to develop and deepen futures and swap capability have questioned the balance between commercial growth and prudential stability. Transatlantic differences have likewise been pronounced in areas like securitization, credit ratings, compensation, and proprietary dealing. Brussels requires issuers to retain 5 percent of securitizations and strict disclosure. Ratings agency oversight has been transferred to the new European Securities Market Authority, which has proposed changing the issuer-pays model and opening competition to a broader range of industrial and emerging economy-based firms. Under the 2010 revised Capital Requirements Directive, banker bonuses must observe a detailed formula proportionate to salaries with provisions for up-front and deferred versions and claw-backs upon performance decline. With their traditional universal banking framework European supervisors do not subscribe to the so-called Volcker Rule, named after the former US Federal Reserve head, which seeks to circumscribe securities portfolio scope in affiliates. However in the stand-alone hedge fund and private equity sphere which New York and London-based managers dominate recently-added European Commission controls that cover valuation, leverage, marketing, and remuneration are much tougher than in other jurisdictions.

In accounting, in turn, the US GAAP is slowly converging with Europe-designed international practice that has spread to the wider G-2O group now debating a range of global system protection measures. The specific breakdown of capital and liquidity ratios under Basel III, too-big to fail designation and cross-border resolution methods, and creation of multilateral cooperation bodies beyond the IMF-located Financial Stability Board are among other issues where despite mutual solidarity pledges member countries and regions prefer to pursue their own naked interests.

Cyprus’ Daunting Greek Debt Divides
2011 May 12 by admin

Posted in: Europe
The Cyprus stock exchange and external bonds shuddered as Euro-zone authorities scrambled to salvage Greece’s unraveling rescue package agreed a year ago with missed fiscal targets and credit default swaps and 2-year market yields at ultra-distressed readings. The island heads into parliamentary elections with the economy “in grave risk,” according to the central bank head, following rating agency bank and sovereign downgrades during the first quarter on Greek public and private sector credit exposure and fiscal slippage. GDP growth was a meager 1 percent in 2010 after the double-digit tempo of the previous decade, as the budget deficit topped 5 percent and will again match that “worst-case scenario” range this year, in the words of the Finance Minister. Government debt is at the 60 percent of GDP Maastricht threshold, but excludes contingent liabilities at the two main listed financial groups Bank of Cyprus and Marfin whose capital could be erased with a sizeable haircut on Greek instruments and spike in nonperforming loans there. The sector as a whole has lines outstanding of $10 billion, equivalent to one-third of output, as of the end of last year, the BIS reports, with the stated capital/assets at 10 percent. To raise revenue and protect account-holders, the parliament recently approved a deposit tax to bring in $100 million and cushion potential system-support costs. Deposits are four times GDP, at almost EUR 70 billion, and have fallen in the past few months on the direct cross-Mediterranean fallout and as Russian offshore wealth is repatriated with booming commodities lifting currency and securities values at home. Nominally Cypriot firms have been among the largest foreign direct investors in Russia and Central Asia in recent years in transactions designed to avoid tax and ownership disclosure burdens.

Despite the extension of VAT to food purchases, the Q1 fiscal gap was over 1. 5 percent of GDP on a 50 percent jump in interest payments and additional aid to the state airline which is still banned from flying in northern Turkish airspace. Opposition parties blame corruption for spending overruns which have already caused the government to backtrack on promised 2010 civil servant salary increases. An overlooked issue in reunification talks is the dual currency, with the euro adopted in 2008 and the lira still circulating in Turkey’s zone. Istanbul has reportedly taken some tourism business from Cyprus and Athens with their troubles, although banks there are also in prudential sights for breakneck consumer and mortgage activity as the ruling party goes to the polls with a comfortable lead and a ticket of identified overheating discomforts.

Ecuador’s Raffish Referendum Riffs
2011 May 10 by admin

Posted in: Latin America/Caribbean
Ecuadorean President Correa notched another referendum win extending constitutional revisions with a judiciary to executive anti-crime power transfer and stripping of media ownership interests from family-run financial-industrial conglomerates. The law and order and anti-business elite moves were designed in part to restore his popularity after a brief military detention over wages and benefits challenged the regime before loyalists quashed any nascent insurrection. Democracy and press monitors claim the actions foster authoritarian tendencies, with the incumbent openly embracing neighboring Venezuela’s political-economic model. The stock exchanges in Quito and Guayaquil, which had lost MSCI frontier representation on scant trading, paused on the victory after a slight uptick through April, as momentum will likely carry over into proposed securities law changes to ensure that debt accounting for 95 percent of activity is backed by “real assets. ” Corporate issuers, which sold almost $600 million in paper in Q1 at an average 8 percent yield, would be unable to continue using securitized-income structures which are about one-quarter of the segment. Last year Nestle’s local unit completed such a headline offering, and exchange executives argue a ban would “break” the market, as they also try to advance plans to transform into for-profit operations. In March the president and his cabinet also met with investors and bank underwriters to broach the possibility of re-entering external bond markets after the 2009 default on “illegitimate” obligations from an earlier exchange. The residual risk premium on 2015 instruments has brought yields almost to double-digits, although performance this year has topped EMBI members. The public GDP growth forecast is 5 percent after only half that clip in 2010 on higher private consumption. The original budget with oil at $75 per barrel saw a slight deficit despite increased spending as new hydroelectric power supply eased fuel subsidies. The current account could return to surplus with better petroleum exports and remittances, and Chinese and multilateral lending continues to ensure capital inflows.

Venezuela’s President Chavez has slapped a 95 percent windfall tax on revenues above $100 per barrel as the fiscal shortfall persists and capital flight and import demand have sent foreign reserves below the “adequate” $25 billion level. Exchange controls have been tight with only $7 billion authorized for the private sector in Q1 as sovereign and state-oil company bond placement and trading remain the main dollar channels. The Finance Ministry’s $12 billion debt program for 2011 already absorbed half that amount for PDVSA as the government courts possible US commercial sanctions for its Iran and Libya dealings. As the president gears up for a re-election bid in 2012 he has shifted an unknown reserve sum to the social spending Fonden pool and also suspended IEA auditing of monthly oil output as intentions for the Andean duo evade transparency.

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The Arab World’s Toppled Regime Crush
2011 May 6 by admin

Posted in: MENA
The IIF in its annual survey placed the Mideast region at a “historic turning point” with economic and political transitions often working at cross-purposes and at different speeds. The group subdivides into GCC and non-Gulf oil exporters and importers including Egypt, Jordan, Morocco and Tunisia considered most at risk from prevailing cost and debt burdens absent urgent competitive reforms. On average they will experience slight recession this year as tourism and domestic and foreign investment plummet and nonperforming loan numbers mount. Their fixed-income and equity performance has suffered greatest, and the 4 percent GDP growth projected for 2012 is contingent on fading unrest. The Gulf countries are at the opposite end of the spectrum, with only Bahrain so far hit in output and financial market terms, although the likely oil and public spending-aided trajectory spans lackluster expansion in the UAE and Kuwait to a 6. 5 percent and almost 20 percent pace respectively in Saudi Arabia and Qatar. Private credit activity will be positive even in Dubai as it benefits from fund diversion elsewhere and a final DW debt rescheduling although other government-linked companies are still in negotiations. With the hydrocarbon price premium of recent months the Council members’ current account surplus will increase $100 billion to near $300 billion as overall foreign assets including in sovereign wealth pools reach $1. 7 trillion. Fiscal balances will be in the black at over 13 percent of GDP, while inflation will surpass 5 percent on generally rising commodity values. The petroleum buying countries in contrast will see large budget and balance of payments deficits which may require resort to bilateral and multilateral soft lending, with Egypt and Tunisia now in discussions over IMF and World Bank support. While CDS spreads have come in from peaks, the equity universe has taken sharp losses with foreign investors exiting en masse. However, forward exchange rates continue to reflect an intact dollar peg, although broader monetary union has been indefinitely shelved with the added geopolitical crisis.

The Arab geography has governance, unemployment, wealth distribution and business climate indicators lagging other developing market destinations, the survey comments. Private investment is below 15 percent of GDP with government dominance “undermining productive activity” such as manufacturing and services. Bahrain will see “no early resolution” as both onshore and offshore banking and the hospitality industry endure blows bringing economic growth to a decades-low. Egypt’s risks are “downside skewed” as the public debt/output ratio touches 75 percent and a second wave of social disruption may loom with a washout in tangible democratic and living standard improvements until next year.

Poland’s Omitted Error-Prone Preening
2011 May 2 by admin

Posted in: Europe
Polish securities were upended by
Hungarian ones as Central Europe favorites as Prime Minister Tusk’s Civic
Platform seeks another term with early reform ambitions unfulfilled and new
private pension and national account setbacks stoking investor doubts. The
government has barely budged in the World Bank’s “Doing Business” ranking since
taking office, and the non-public social security contribution was cut as a
portion of salaries by two-thirds to keep the debt below the 55 percent of GDP
ceiling that by law automatically triggers austerity measures. The fiscal
deficit will still exceed 5 percent this year under a best-case scenario, and
statistical integrity more broadly has been undermined by the discovery of a
near EUR 15 billion “errors and omissions” item in the balance of payments that
may double the officially-reported current account gap. The central bank has
acknowledged the large discrepancy, which it argues is due mainly to untracked
German car imports, but claims no net drag on output as domestic demand was
also understated under existing methodology. The fracas erupted as the capital
account has shifted to 75 percent reliance on portfolio inflows, and the
privatization program foresees $5 billion in upcoming Warsaw Exchange sales to
raise revenue and the regional and international commercial profile. A listed
Ukrainian firm was recently added to the blue-chip index under a longstanding
strategy to lure neighbors with initial outreach also to companies in culturally-related
Belarus
before the crackdown there following the President’s re-election. Another stake
in Bank PKO will also go on the block as the foreign-dominated sector has
maintained good earnings despite NPLs at close to 10 percent of the total. GDP
growth is put at 4 percent in 2011 on inflation at the same level, with the
benchmark rate already lifted slightly entering an expected tightening cycle.
Mortgage lending has been flat and consumer appetite has been hurt by higher
VAT as corporate and infrastructure credits have become the most popular
segments ahead of the Euro 2012 football competition.



The zloty has backtracked against
both the euro and dollar as almost $9 billion in external bond issuance, the biggest
among EMBIG components, is slated this year. The CDS spread with Hungary has
aligned as the latter successfully placed $4. 25 billion covering three-quarters
of annual needs after re-affirming the 3 percent of GDP budget deficit goal
through its own pension and tax grabs. To diversify the buyer base debt
managers in Budapest traveled to China in April as
a revised constitution was also expedited through parliament with the Fidesz
party majority over opposition and European watchdog objections. It enshrines a
50 percent of GDP public debt objective along with political influence over the
monetary authority as ingrained assumptions are recast.





Thailand’s Testy Temple Tiffs
2011 May 1 by admin

Posted in: Asia
Thai shares struggled to keep
Asia-leading status as the worst fighting in decades again erupted along the
Cambodia border over disputed temple ownership amid rumors the army action was
designed to interfere with upcoming elections which exiled former premier
Thaksin intends to contest through allied parties, as the incumbent Ahbisit
seeks coalition support to hang on to power. The UN appealed for calm and urged
that the spat be referred to outside arbitration. The government temporarily
closed activist radio stations under the pretext of state security in an effort
to ensure backing for the skirmish and avoid a repeat of last year’s bloody
anti-regime street protests over such policies. The move came as Japan’s
post-earthquake trade cutoff may begin to pinch, although exports were up 30
percent in March with ample current and capital account surpluses. 10 percent
of foreign sales go to Japan
with autos and electronics the top categories, and over half of external debt
is yen-denominated. Imports include machinery, plastics and steel, and likely
higher costs from the disaster’s supply squeeze combine with the oil price
spike from the Mideast crisis to dent the
balance of payments. In response to the energy burden the timetable for
slashing diesel subsidies has been postponed to the second half even as the
fiscal deficit could break the 4 percent target. It has also sent inflation
toward 3 percent which could bring a further series of central bank rate hikes.
The official stance is that neither near-term economic or political shifts
should change underlying currency direction which has recently been steady
against the dollar with occasional intervention on the back of re-institution
of the bond inflow tax.



However many private analysts
question the $20 billion expansion of overseas borrowing the past year, almost
half through the banking sector, which may have used the channel for forex
hedging as well as domestic credit availability. The amount was the largest
since the 1990s financial crisis, and companies have also tapped the lines
given the cheap greenback funding offered and difficulties in consummating
local capital markets transactions with uncertain IPO appetite and hefty
government paper issuance crowding the space. The GDP growth forecast remains
intact for 4-5 percent heading into the first “normal” election and post-crisis
rates cycles in years, although neither the prospect of unconventional
prudential or military measures can be dismissed with tenacious tensions.



Pakistan’s Packed Cabinet Purge Purse
2011 April 27 by admin

Posted in: Asia
Despite the spectacular bin Laden
assault, Pakistan shares continued their flat course as a cabinet reshuffle and
consolidation demanded by the opposition following the departure of the ruling
party’s coalition partner failed to ease political bickering and produce a
fiscal reform package needed to unlock the remainder of the IMF’s $11 billion
support program. The army had also recommended ministerial changes and
combinations to bolster anti-terror credentials and cost-cutting as defense
spending and the intersection of military-commercial links come under scrutiny.
The Fund had granted a nine-month extension to achieve compliance with tax
revenue and VAT introduction targets, as the current arrangement expires with a
heavy repayment schedule next year that has kept sovereign CDS at the
distressed threshold. The MQM group left the government in January after a fuel
subsidy cut designed to satisfy the criteria, but popular outcry and judicial
rulings questioning legality provoked immediate retreat. The last $3. 5 billion
chunk and new post-flood donor commitments which have been slow to materialize
are essential to bridging the fiscal deficit that will surpass 8 percent of GDP
as growth slumps to 2. 5 percent. The roughly $120 billion in debt at 75 percent
of national income is divided equally between domestic and external issuance,
with servicing costs above $3 billion in the past fiscal year with benchmark
interest rates and inflation in double-digits. This year’s rupee outlays have
been five times original projections as provisions in the fiscal responsibility
law were again breached. To diversify the buyer base, the central bank has
increasingly turned to sukuk auctions as Islamic banking assets are at 5
percent of the industry total. The balance of payments has skirted another
crisis on aid infusions, with the US approving a new 5-year $1. 5 billion annual
economic development pipeline, and record worker remittances mainly from the
Gulf region. International reserves are close to $18 billion as the currency
has steadied at 85 to the dollar.



Sri Lanka’s stock exchange has
shown the same trajectory as commercial sovereign debt and international
assistance plans are on hold after the UN filed a report accusing the
government of human rights abuses in the final civil war victory push against
Tamil rebels. The GDP growth forecast has been for another 8 percent on
tourism, infrastructure, agriculture and garment advances, and a new tax regime
went into effect that should help collection.
The current account deficit has
widened however, and authorities continue currency intervention amid
incremental capital account liberalization. Both South Asian markets, despite
lackluster results, are far ahead of Bangladesh’s 30 percent loss as the bottom
frontier performer, as retail punters take to the streets to press for official
rescue with few remedies available in the cabinet

The Andes Climb’s Creaky Crevices
2011 April 20 by admin

Posted in: Latin America/Caribbean
Peru’s Q1 20 percent stock market
selloff worsened, with small bond foreign inflows also reversing, as populist
candidate Humala won the first round presidential contest with a slight lead
over second-place finisher Fujimori, with the business community’s preferred
choices Toledo and Kuczynski eliminated. The ruling center-right APRA party of
President Garcia, whose approval rating is 25 percent, did not even field a
contender. Humala’s opponents claim that with his platform of more equal wealth
distribution through a “national market economy” he remains allied to
Venezuela’s President Chavez, who campaigned on his behalf during the last
effort at the top post. The former army officer now portrays himself as a
moderate who will uphold current fiscal and monetary directions while
renegotiating international mining contracts, extending state pension coverage,
and changing the constitution. His law and order stance mirrors Fujimori’s who
serves in Congress and draws support from her father’s admirers recalling
privatization and anti-terror successes and downplaying subsequent corruption
charges and convictions. Toledo commanded a wide early margin but faded, with
the competitive reform initiative seized by longtime investment banker PPK, who
ultimately fell short as too old and
elite to appeal to young, poor and working class voters especially outside
Lima. Last year GDP growth was almost 9 percent with credit up 20 percent,
according to the central bank, which has intervened on both sides of the
exchange rate and introduced prudential restrictions on speculative positions.
The pre-election goal of achieving budget balance has been undermined by
additional food and fuel spending, with commodity inflation spurring
incremental interest rate upticks. The government has won good marks for
building infrastructure, in particular roads to remote rural destinations, but has
been in charge during a wave of killings associated with drug violence.



The country has supplanted
neighboring Colombia in the cocaine export standings, and in addition to
cross-border security implications, commercial ties are at risk with the poll
outcome with large cement and electricity investments. Chile’s LAN airline has its main hub in Lima, and the stock
exchanges between the three jurisdictions have joined in a formal alliance.
Colombian President Santos already has a packed diplomatic agenda agreeing to a
labor union treatment compromise to break the impasse over the US free trade agreement, and recently hosting a
summit in an attempt to reinvigorate links with Venezuela. One ratings agency has
restored investment grade status while record flooding continues to challenge
fiscal adjustment and anti-inflation mettle, with Andean topography still
defying surefire scaling.

Argentina’s Punishing Inflation
2011 April 20 by admin

Posted in: Latin America/Caribbean
Argentine stocks and bonds
extended losses on their respective MSCI and EMBI indices as IMF officials at
their spring conclave expressed doubt that the government would accept a
technical mission’s recommendations for a new inflation index. President
Fernandez, with a 60 percent approval rating heading into October elections
although her candidacy remains undeclared, reported a 10 percent number in
February while allowing a public sector wage hike of 25 percent, which outside
analysts cast as the true reading. However private consulting firms have become
more hesitant to challenge the official figure after they were ordered to
divulge their methodologies or face hefty fines. The pattern of commercial
interference has crossed into big companies where the state has a minority
stake through pension fund and other holdings following a directive that shares
will be actively voted. Steelmaker Siderar has taken the issue to court, but
the Finance Ministry asserts full legal authority to press its interests in the
same fashion that the social security portfolio is used for buying Treasury
debt. The central bank meanwhile with over $50 billion in foreign reserves
continues to manage the exchange rate at 4 to the dollar, and the commerce
department has introduced limits on automatic import license renewals, both in
an effort to boost the trade surplus. Strong commodity exports and
stimulus-induced domestic demand are due to deliver 6-7 percent GDP growth this
year after 2010’s almost double-digit clip. Record prices for soybeans, wheat
and flour sold abroad have combined with a 30 percent rise in infrastructure
spending at home to bring a consumption boom that has also been accompanied by
a physical cash squeeze and mounting law and order problems. Security is likely
to feature alongside economic policy as a prominent element in the presidential
campaign and has already been raised by the Radical Party standard-bearer
Alfonsin. Within the Peronist grouping President Fernandez may be challenged on
these fronts for the nomination, but a potential rival provincial governor has
demurred after accusations of vote-rigging.



As a G-20 member, Argentine
representatives continued Paris Club debt renegotiations at the Washington
meetings, but their reduction and payback period demands have been rebuffed by
counterparts. An eventual deal may be complicated by the political uncertainty
of the polling period, and any attempt to resume sovereign bond issuance will
too likely be deferred into next year. The provinces and corporates together
have tapped external markets for $5 billion since 2010’s reopened exchange,
with non-participating foreign creditors still moving to attach assets. However
data trackers report sustained overseas inflows into local inflation-adjusted
debt which offer high yields even if
confidence in the measure is at the opposite extreme.

India’s Crossed Anti-Corruption Communications
2011 April 20 by admin

Posted in: Asia
Indian shares were off 6 percent
through the first four months, at the bottom of the major Asian pack, as the
trial of the former telecoms minister began who is accused of shortchanging the
state of $40 billion in revenue through crooked license awards. Several
high-profile officials and business executives have been ensnared by the court
proceedings the Singh administration has cited as an example of its “no
tolerance” anti-graft stance. Big listed family groups like Tata have
criticized his team for poor regulation and public services, and a slow reform
pace after unveiling an ambitious agenda upon re-election. It has concentrated
on overseas as opposed to domestic expansion, and warned of wide-scale social unrest
in the wake of the phone and other scandals. The financial sector may soon
liberalize private insurance and pension fund segments, but local elections
scheduled in the coming months may reveal the depth of the ruling coalition’s
unpopularity and compel Congress Party leader Gandhi to tap another prime
minister. The federal government in April moved to assuage foreign direct
investors by ending repeat approval requirements for new commercial units after
initial establishment. The last fiscal year these inflows were $22 billion
compared to the previous annual $38 billion total. British companies are
embroiled in a series of tax and environmental disputes which UK Prime Minister
Cameron raised during a recent bilateral trade visit. On the portfolio side, outflows
have replaced 2010’s record allocation despite increases in FII ceilings and
domestic mutual fund opening to retail subscription in the latest budget. Asset
manager stocks immediately jumped on the announcement, but the securities
supervisor SEBI still has to draft rules for entry, and cross-border clashes
may result from different commission and customer verification approaches. The
vehicles must also vie with the spread of dedicated ETFs in the US, Europe and Asia
that already enable ready access.



The other regional “I,” giant
Indonesia, has tried to present itself as a compelling alternative and was
further motivated as the original BRIC club formally added South Africa as its
first new member. It advocated for an investment-grade rating at the recent
G-20 Washington gathering, and the central bank pointed out that international
holdings of its bonds were again at one-third the amount outstanding despite
the imposition of short-term maturity limits. A secondary bank reserve
set-aside also went into effect in March, although the benchmark interest rate
was maintained as inflation hovered at 6. 5 percent and fuel subsidy removal was
postponed. In external accounts, coal, natural gas and palm oil exports have
soared, although on the flip side payment and repatriation transfers also
increased to an unprecedented $20 billion last year signaling mixed
communications.

Nigeria’s Stymied Goodluck Streak
2011 April 20 by admin

Posted in: Africa
Nigeria’s share gauge battled for
positive status after consecutive parliamentary and presidential elections
which encountered delays and geographic-religious strife after Delta Southerner
Goodluck Jonathan handily won a full term as chief executive. He will continue
in office as oil prices are almost double the $65/barrel plugged into the
budget, with an industry modernization package which was enacted the past year
high on the immediate implementation agenda. The regime aims to align treatment
of longstanding Western multinationals subject to recent tax and royalty
increases with new deals struck with Chinese counterparts that have offered
large infrastructure building programs in exchange for favorable terms. Bank
cleanup has also featured with the central asset management agency issuing its
first public bonds to cover bad loan resolution. Templeton’s emerging markets
team also picked banks as a top frontier pick with valuations in single-digits.
On the debt side, following an inaugural sovereign placement, foreign reserves
and the naira have been steady, although regular intervention is designed to
keep it in the 150/dollar range. As the level stabilizes, authorities may
expand overseas access to domestic government bonds as they work with donor
technical assistance on modernization plans.



Adjacent Ghana has progressively
opened across the fixed-income spectrum and the stock market was up 20 percent through
the first four months as the IMF predicts GDP growth will double last year’s 6
percent with the start of offshore oil production. However it also cautioned on
budget and inflation outlooks, and on preserving post-HIPC external debt
sustainability as another sovereign flotation is considered. Kenya too has
gotten legislative approval for a maiden effort as it has pushed the average
local maturities to over 5 years with double-digit coupons to compensate for 9
percent inflation as of March. A poor rainy season, and Hague Tribunal
indictments against ministers for alleged crimes during the 2008 tribal
bloodbath, have dented equity sentiment, with the bourse off 12 percent through
April.



To the south, Botswana’s exchange
has led with a 20 percent gain with diamond price recovery, while Cote d’Ivoire
has paced the EMBI with a 25 percent rally as Gbagbo forces were finally
defeated and removed from power. Former IMF official Outtara will take the helm
with one missed Eurobond interest payment to satisfy as commercial and
multilateral lenders look to resume operations. He has already called for an
end to the cocoa export boycott, and will regain use of regional central bank
reserves that were sanctioned as investors eye an end to a decade of bad luck
and belligerence.

The IMF’s Risk Map Detours
2011 April 15 by admin

Posted in: IFIs
The April IMF Global Financial
Stability Report highlighted advanced economy bank and sovereign debt overhangs
as lingering perils, but also cited generic and country-specific emerging
market capital flow complications as nascent risks. In the US, Europe and Japan deleveraging has been slow
and capital raising for euro area banks in particular has lagged. Short-term
bond rollover requirements following state rescues there are heavy, and asset
quality in property and government paper portfolios continues to slide and will
be underscored by the latest stress testing round. European sovereigns have
become a “high-spread” asset class, sidelining the traditional investment-grade
investor base and placing the central bank in an unaccustomed buyer role that
for commercial and prudential reasons cannot be sustained indefinitely. Annual
interest costs in the 20 percent of revenue range are onerous and Treasury and
JGB yields will also inevitably rise from historic lows, especially as worries
mount about long-term fiscal paths. Corporations, especially small and midsize
firms, and households with job and housing value losses are also under unabated
balance sheet pressure. Against this background foreign direct equity and
lending lines to developing economies have been flat while securities
allocation dominates. This group has a combination of slimmer output gaps and
inflation spurts that warrant monetary tightening; G-3 quantitative easing
shows “little evidence” of triggering the liquidity wave, according to the
Fund. In its view emerging market corporate access may be overdone, as
lower-rated names tap local and external debt channels. Leverage is above
historic averages and a small interest rate shift could endanger servicing
capacity. For stocks, systemic bubble scope is “remote” but valuations in many
cases are frothy.



The MENA geopolitical spillover
may have industrial world effects with $350 billion in bank exposure to the
region by BIS data, and petrodollar recycling to key financial centers likely
to follow alternate patterns short of outright disruption. State-owned banks in
large markets like Brazil and China have been on a credit tear. more than
doubling operations from the early crisis period through end-2010. Wholesale
borrowing rather than deposit buildup has facilitated expansion and possible
overheating should concern supervisors. On other topics, Dubai’s debt workout
after a prolonged saga still leaves risk management and transparency gaps, and
ETFs which have mushroomed to over $200 billion for the emerging market
universe may introduce fresh distortions and threats to orderly well-monitored
transactions. They also insert another level of legal, policy and counterparty
complexity that could frustrate simple bets on next-generation business
superpower status, the review cautions.

The IMF’s Capital Flow Patrol Patter
2011 April 7 by admin

Posted in: IFIs
Just prior to its April
all-member session, the IMF’s policy and strategy arm circulated a draft design
for determining the nature and sweep of acceptable capital inflow controls
following a charge from the last G-20 summit where industrial and developing
country representatives recognized their reality but split on their application
and definition. The paper distinguishes the measures from conventional economic
policy and prudential supervision elements to embrace targeted administrative,
tax, or oversight action, and further notes potential permutations between
residents and non-residents. It cautions that they not divert from underlying
needed shifts in exchange rate level and the fiscal-monetary stance which can
achieve global “rebalancing,” and that the overriding financial stability goals
be clearly identified to shape a proportionate response. In an historic
retrospective current emerging market portfolio investment may be at a record
in terms of quarterly advances, driven by both push and pull and cyclical and
structural causes. In the post-crisis timeframe local debt concentration has
been particularly prominent, with the foreign share of government securities in
double digits and corporate paper also getting attention. US and European
mutual and pension funds have been active buyers of longer maturities, and
Japanese retail players have also entered. The allocation will be “persistent
and strong” into the future, with the recipient countries’ solid growth and macroeconomic
management, financial system modernization, and institutional investor moves
from asset class underweighting. Bond and stock prices have jumped the past
year but bubbles, as calculated by traditional valuations, have not yet
appeared. However credit growth may be too rapid in Brazil, Turkey and
elsewhere, and in Asia especially authorities have resisted currency
appreciation and interest rate “normalization” in light of money and
commodity-influenced inflation creep. The budget position has likewise stayed
expansionary, and the use of short-term inward capital curbs has been to “mixed
effect,” with still attractive returns confining the limits to “marginal”
consideration.



However uncertainty has spiked
around the potential intensification and reclassification of existing regimes
and “abrupt announcements” which have angered and surprised participants
accustomed to relatively open and smooth official communication. The practice
guide suggests that price-based approaches are more transparent than procedural
ones, and that costs in terms of compliance and enforcement could hurt
securities market building. A 40-country exercise found that only one-quarter
met the mooted requirements for justifying control measures. Brazil’s
representative at the Fund immediately blasted the norms as undue interference
as the central bank exercised its prerogative to extend the 6 percent inflow
levy for up to 2-year company loans.

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Belarus’ Devalued Dogma Dash
2011 April 6 by admin

Posted in: Europe
Belarus’ just-issued $800 million
Eurobond after a debut last year reeled on an 8 percent formal devaluation of
the currency, and subsequent free-float move, as one-fifth of foreign reserves
were depleted to hold the previous band and cover the 15 percent of GDP current
account deficit. A $3. 5 billion IMF arrangement expired in mid-2010 and any new
request will be complicated by US and EU sanctions imposed against the
Lukashenko regime after he again took the presidency in a widely-condemned
contest accompanied by opponent arrests and attacks. Alternative support may be
forthcoming from Russia and Kazakhstan
after they joined in a Common Economic Area to succeed the old CIS. Moscow already subsidizes
energy imports and has extended commercial loans. The new 5-year plan calls for
increasing the private sector presence which is only one-third of output, but
objectives are “multiple and inconsistent,” in the opinion of the IMF’s Article
IV report. It declares that “loose pre-election policies created urgent
domestic and external imbalances” while bringing 7. 5 percent growth and an
average wage hike to $500/month. Net reserves sank $6 billion despite the
cross-border borrowings, and credit expansion for the priority agriculture and
housing sectors was 40 percent last year. Interest rates were cut and the
budget gap hit 3 percent of GDP. The central bank conducted $4 billion in murky
“deposit exchanges” with local banks swapping hard currency for liquidity
lines, with over half that sum completed in the final quarter as trade and
financial pressures mounted against continued authoritarian rule. Monetary
policy has since tightened, and recapitalization has raised the system-wide
ratio to a reported 20 percent of assets, although non-performing loans have
yet to apply revised classification criteria. Legal and institutional
frameworks for privatization were approved, but only a few companies have been
offered that investors spurned.



The Fund warns of an
unsustainable path as gross external debt heads toward 75 percent of GDP and of
unrealistic near-term estimates for asset sales and export penetration to expedite
adjustments. FDI in particular is still hampered by lagging structural reforms
that would modernize regulatory and dispute-resolution approaches. Tax changes
are needed to bolster competitive strengths in equipment and machinery. In the
financial sector, state control may be reinforced with establishment of an
umbrella Development Bank, and non-bank securities market progress has been
slow. The analysis praises a new “bill of rights” for entrepreneurs, while
citing “retrograde elements” in other presidential decisions mirroring the consensus
from a purely diplomatic perch.

The African Diaspora’s Homeward Bonds
2011 April 6 by admin

Posted in: Africa
On the eve of the spring Bretton
Woods institutions’ meetings, the World Bank and African Development Bank
extended joint research on remittances and migration into a separate treatment
of diaspora savings behavior and the prospect for placing dedicated Sub-Saharan
bonds with that base. Official data count international African emigrants at 30
million, with half relocated on the continent in destination countries like Kenya and South Africa. High-income domiciles
include the US, Europe and the UAE and Saudi Arabia in the Gulf, with Nigerians
the largest group in the US. Communities are active in trade and investment
missions with home nation embassies often targeting them through special
outreach efforts. Migrants transfer funds for both business and household
purposes, with non-resident property ownership restrictions often relaxed in
their case. Studies of returning Ghanaians and Ivoirians show large percentages
with at least $5,000 in cash on hand which they then plow into small and
midsized firms across a range of sectors. The total annual amount of expatriate
accumulation is estimated at $50 billion, or over 5 percent of GDP, which could
be placed in capital market instruments. The agencies recommend a sovereign
push into retail diaspora bonds to harness this potential, which could be sold
through cross-border banking and money processing networks. Lower interest
rates could offset the higher costs involved, as individuals with this
background would presumably be more loyal to the recipient regardless of return
and accept local in lieu of foreign currency payments in a contingency. If
legal or creditor action were required domestic linkages could be tapped for
recourse. The issuer will of course face standard capacity and willingness to
service debt questions where existing or solicited ratings can be useful
components. Earmarking the proceeds for specific infrastructure and social
projects could heighten interest, especially if marketing and publicity is
otherwise limited as in recent attempts by Ethiopia
andNepal.



India and Israel have had the
most successful programs raising $40 billion even in times of crisis, while
Sub-Saharan transactions could be $5-10 billion yearly, according to
preliminary projections. The paper could be part of a diverse portfolio engaged
under pooled diaspora investment funds
at home and abroad, which typically lack liquidity and scale and professional
management, the survey reveals. Associations, such as in Denmark, already
bundle remittances for common country outlays, for which they may also
contribute skills and technology. Dual citizenship and voting rights where
authorized can solidify bonds in all respects, the document suggests as senior
development bank executives champion financial market ties.

Iraq’s Wrenching Oil Machinery Wrangles
2011 April 1 by admin

Posted in: MENA
Iraqi debt prices teetered after
the post-government creation glow as Shiite/Sunni sectarian violence again
flared, with neighboring Bahrain confrontations aggravating the split, as US
troops prepare to end combat operations. Oil prices spiked on regional
tensions, but 2010 production fell short of potential with attacks and
infrastructure bottlenecks, and medium-term plans for a pipeline through Syria are also
in doubt from the anti-regime protests there. The extended Al-Maliki
administration has yet to name key ministers as coalition partners continue to
squabble, and the IMF delivered a lukewarm endorsement of its record under the
2-year $3. 5 billion program agreed last year. Single-digit inflation and
exchange rate stability have prevailed, with international reserves reaching
$50 billion, but petroleum exports were 250,000 barrels/day under the target,
and the budget deficit mark was also missed. New geological surveys put proven
reserves at near 150 billion barrels, second globally behind Saudi Arabia’s.
Upgrades to the Basra
terminal are key to realizing capacity, according to foreign companies that
have gotten recent contracts, and fiscal outlays are designed for such
improvements as well as social and security purposes. Central bank independence
has been established by court decision, and the benchmark rate is positive in
real terms. State-owned banks Rafidain and Rasheed and the pension fund are
active Treasury bill buyers, although private financial sector progress has
been slow. The Fund’s latest assessment posits a budget surplus on higher oil
prices and bank restructuring initiatives that could solicit overseas interest
in 2011. An important element in generating confidence is resolution of
outstanding Saddam-era external debt claims with non-Paris Club and commercial
creditors, with negotiations conducted “in good faith” in its view.



Saudi Arabia’s dozen banks with a
range of Islamic, joint venture and local entrants in contrast have sustained
modest private credit expansion through the first quarter, with the industry
loan/deposit ratio at 80 percent. A long-awaited mortgage law has been approved
to facilitate a housing push announced by the King, who has committed to
building tens of thousands of additional units and to relieving 10 percent
inflation in the sector on chronic shortages. UAE counterparts also see better
prospects with the 100 percent lender and bondholder acceptance of Dubai
World’s massive rescheduling after eighteen months of talks. Syria’s nascent
non-government intermediaries, mainly units of Lebanese parents, in contrast have
suffered from the crackdown there with the currency and infant stock exchange
both off sharply. US
trade sanctions remain in place, and projects including a billion dollar metro
line have been indefinitely sidetracked.

Asian Corporate Bonds’ Lopsided Lurch
2011 March 30 by admin

Posted in: Asia
The Asian Development Bank issued
its 2010 local bond market retrospective in advance of its annual meeting which
is to focus on inflation and supply chain complications from rising commodity
prices and Japan’s
natural and nuclear disasters. East Asia’s
domestic debt size passed $5 trillion, with corporate issuance up 20 percent to
$1. 5 trillion as central bank and government activity tapered toward year-end.
Companies in China, Vietnam, Indonesia and Korea were particularly engaged, but
a first-time analysis shows that only a handful of prime-name placements
dominate individual markets. The official segment still comprises 70 percent of
the regional amount outstanding, with Malaysia and Thailand recently
experiencing spurts, and yield and appreciation-seeking foreign investors
buying and trading heavily despite increased inflow curbs. Maturity profiles
have extended and flatter yield curves have now turned steeper with monetary
policy “normalization” to recapture pre-crisis real rate levels. External
volume in the euro, dollar and yen hit $100 billion since the start of last
year through March, a growth pace double the local strides. Mainland Chinese
paper is inaccessible except to authorized interbank dealers although Hong Kong’s fledgling “dim sum” tier provides renimbi
exposure and Exchange Fund bills there have become a popular proxy as evidenced
by the latest survey of the NY-based Emerging Market Traders Association. Both
private and state-owned banks and enterprises feature in the corporate space,
with Korea
by far the former category standout. Islamic-style fixed-return versions have
proliferated, but Malaysia
remains the area hub and is expected to further bolster its status as Middle East offerings are redirected on prevailing
unrest. The international ownership
stake for Indonesian instruments is 30 percent, but concentration in short-term
central bank bills subsided with holding limits and new open market operations
channels. For the group, only a minor portion of maturities are greater than 10
years, and turnover ratios outside China’s are low.



The Philippines
at $8 billion was the biggest external sovereign player in 2010, followed
closely by Indonesia.
Korea and China topped
the international corporate list, with banks and energy companies prominent.
The pan-Asian bond index rose 10 percent but still lagged equity counterparts,
while the Malaysian ringitt and Thai baht saw double-digit advances versus the
dollar. Through Q1 of this year, performance has reversed with the MSCI Asia
reading negative as a whole, while the local fixed-income benchmark is flat.
The update predicts that “risk on-risk off behavior” will stir additional
volatility as inflation and growth ingredients in the mix are shaken.

The IDB’s Calgary Stampede Strut
2011 March 29 by admin

Posted in: Latin America/Caribbean
The Inter-American Development
Bank’s annual gathering in Calgary Canada, known for its cowboy lore, reflected
an upbeat mood and outlook as $12 billion in record lending was revealed, and
public and private sector delegates released positive 2011 growth and policy
forecasts. US Treasury Secretary Geithner won attendee praise with appeals for
passage of the long-stalled bilateral Colombia free-trade pact and for
increased multilateral funding from the G-20 as Republicans now controlling the
Congress in Washington look to gut appropriations to the Bretton Woods institutions
to show fiscal prudence. Attention was also focused on Haiti, as first-round
presidential elections proceeded peacefully and the bank prepares for a full-day
dedicated conference in June, convening donors and government and business
leaders. Former president Aristide returned from exile in South Africa on the
eve of the poll and indicated he will not again seek political office but instead
would promote faster rebuilding and anti-poverty progress. The Institute for
International Finance in a side meeting with members circulated a report that
regional GDP growth will slow to 4. 5 percent but that foreign direct and
equity-driven portfolio investment will continue near historic highs and
sustain currency appreciation. Both domestic and external demand supported a 6
percent output increase in 2010 with Argentina’s
almost 9 percent at the top and Venezuela’s
2 percent shrinkage at the opposite end. Average inflation hit 8 percent with
the highest readings from non-targeting countries. With better terms of trade,
the current account deficit was under 1 percent of GDP and private capital
inflows were four times the gap at $220 billion, with commercial bank credit at
almost $30 billion after the previous year’s outflow. Sovereign debt spreads
improved and stock markets saw double-digit upswings, as currencies in Brazil, Chile
and Colombia
regained pre-crisis levels.



Capital controls and monetary
tightening have been responses with routine sterilized and unsterilized
interventions, and higher benchmark rates and reserve ratios. Brazil’s
anti-appreciation package encompasses a half-dozen components from taxes to
derivatives limits and authorities have also begun to withdraw related fiscal
stimulus. Restoring budget balance is a near-term priority, and Latin America’s
external debt profile continues to advance with exports almost equal to the
amount outstanding and interest charges at under 5 percent of overseas
commodity and manufacturing shipments, especially to China and other emerging
market partners. Argentina is in a final stage of resolving sovereign arrears
from a decade ago as it tackles $7 billion owed the Paris Club, which must
follow the comparable treatment standard for private creditor reductions to
date even as economic boom times otherwise may be incomparable.

Europe’s Frontier Fashion Fringe
2011 March 25 by admin

Posted in: Europe
Frontier Europe topped the MSCI
pack in Q1 with 20-30 percent gains from surprise sources like Bulgaria and Serbia with tiny exchanges. In both
state enterprise offerings are contributing momentum after numerous past delays,
driven by post-crisis pushes for fiscal balance and higher foreign direct and
portfolio investment. Bulgaria,
which is also a marginal EMBI sovereign debt component, barely registered
economic growth last year as consumption decline offset export performance. The
budget deficit quadrupled as a fraction of GDP to 4 percent, although it was
among the EU few to approach the Maastricht single-currency
cutoff. The government had fiscal reserves on hand to maintain the currency
board without IMF help, although headline inflation trended toward 5 percent.
The current account deficit, which had been in double-digits as a portion of
output, was less than 1 percent, but capital inflows were lackluster as the
banking and property sectors cooled. Short-term external debt remained
manageable as domestic credit was flat with NPL ratios at one-tenth the total,
and Greek parents kept their local presence intact despite the banking crisis
at home.



Serbiajust completed its emergency
EUR 3 billion IMF program and has requested a precautionary extension after a
long-postponed oil refinery divestiture. GDP of 1. 5 percent last year was half
2009’s contraction and steel production has recently increased. The budget gap
at 4. 5 percent of GDP was within target despite the dilution of pension reforms
which triggered worker protests as elections approach. Inflation is above 10
percent and Treasury bond yields at 12 percent on cumulative energy, food and
wage pressures. The trade deficit narrowed on currency depreciation but the current
account shortfall was still 7 percent of national output. External debt, split
60-40 between the private and public sector, is at 80 percent of GDP, and bank
short-term borrowing has risen. Monetary policy has tightened after large
interest rate cuts in the early crisis cycle, with reserve requirements hiked
for foreign exchange transactions. The banking system remains overleveraged
with the loan-to-deposit reading over 125 percent on double-digit annual
business and household credit expansion. While EU accession is now considered a
long-term goal, Serbian representatives met last month with counterparts from
Kosovo as tensions abated following the latter’s internationally-recognized
independence to discuss outstanding border control and commercial integration
issues. UN and other observers praised the tone of the talks and expressed
confidence in eventual substantive results that could mirror year-to-date
exchange deliverables.

Egypt’s Brazen Broken Circuits
2011 March 25 by admin

Posted in: MENA
After numerous postponements, and
just before the 40 business day deadline that may have warranted MSCI core
index expulsion, Egypt’s
post-Mubarak stock exchange reopened with automatic circuit breakers imposed
with daily 10 percent falls. The hiatus was the longest close since Pakistan’s in
the aftermath of the Lehman Brothers bankruptcy, when it set an arbitrary price
floor that led to demotion to the frontier tier and later had to be removed as
a condition for IMF concessional lending. The bourse during the almost 2-month
period also scrambled to put in place protections for local retail investors
who had borrowed heavily on margin from banks and brokers before the
unrest-related 20 percent plunge. A small support fund was established and the
rules for triggering calls when share values meet a specific credit portion
were relaxed. Domestic and foreign institutional players backed the measures,
but maintained they could have been adopted with active trading. They also
questioned the application of ambiguous new disclosure requirements on listed
companies in an effort to determine past ties with the Mubarak regime that
could spur prosecution and reputational damage. Big listings owned by the Ezz
family and other longstanding allies are already under investigation and dozens
of firms were suspended for initial failure to comply. Criminal charges have
extended to the former Finance and Trade ministers who have sought safety
abroad and championed capital market opening and modernization. The exchange head had come under relentless
criticism for erratic decision-making and constant delays and was replaced by
the interim government on the eve of re-launch, when a referendum on election
and constitutional change timetables also won overwhelming approval.
Parliamentary polls in September will precede a presidential one by year-end,
with the previous ruling NDP and Muslim Brotherhood parties said to be at an
advantage as veteran political groups.



Although the GDRs of Orascom
continued to be battered since mid-January, a successful asset sale by the
majority owner Sawiris clan to Russia’s
Vimpelcom was a piece of good company news as low double-digit valuations drew
bargain hunters. Commercial International Bank was also ravaged as only domestic
buyers are left for Treasury paper, which is already a high portion of assets,
after foreigners reportedly liquidated their $10 billion position, which had
represented almost one-quarter of the outstanding total.